SSRN Working Papers

We create a broad measure of corporate governance, Gov-Score, based on a new dataset
provided by Institutional Shareholder Services. Gov-Score is a composite measure
of 51 factors encompassing eight corporate governance categories: audit, board of
directors, charter/bylaws, director education, executive and director compensation,
ownership, progressive practices, and state of incorporation. We relate Gov-Score
to operating performance, valuation, and shareholder payout for 2,327 firms, and
we find that better-governed firms are relatively more profitable, more valuable,
and pay out more cash to their shareholders. We examine which of the eight categories
underlying Gov-Score are most highly associated with firm performance. We show that
good governance, as measured using executive and director compensation, is most highly
associated with good performance. In contrast, we show that good governance as measured
using charter/bylaws is most highly associated with bad performance. We examine which
of the 51 factors underlying Gov-Score are most highly associated with firm performance.
Some factors representing good governance that are associated with good performance
have seldom been examined before (e.g., governance committee meets annually, independence
of nominating committee). In contrast, some factors representing good governance
that are associated with bad performance have often been examined before (e.g., consulting
fees less than audit fees paid to auditors, absence of a staggered board, absence
of a poison pill). Gompers, Ishii and Metrick (2003) created G-Index, an oft-used
summary measure of corporate governance. G-Index is based on 24 governance factors
provided by Investor Responsibility Research Center. These factors are concentrated
mostly in one ISS category, charter/bylaws, which we show is less highly associated
with good performance than are any of the other seven categories we examine. We document
that Gov-Score is better linked to firm performance than is G-Index.

There is increasing evidence that broad measures of firm-level corporate governance
predict higher share prices. However, almost all prior work relies on cross-sectional
data. This work leaves open the possibility that endogeneity or omitted firm-level
variables explain the observed correlations. We address the second possibility by
offering time-series evidence from Russia for 1999-present, exploiting a number of
available governance indices. We find an economically important and statistically
strong correlation between governance and market value both in OLS and in fixed effects
regressions with firm-index fixed effects. We also find large differences in coefficients
and significance levels, including some sign reversals, between OLS and fixed effects
specifications. This suggests that cross-sectional results may be unreliable. We
also find significant differences in the predictive power of different indices, and
in the components of these indices. How one measures governance matters.

Separation of ownership and control in firms creates information asymmetry problems
between shareholders and managers that expose shareholders to a variety of agency
risks. This paper investigates the extent to which governance attributes that are
intended to mitigate agency risk affect firms' cost of equity capital. We examine
governance attributes along four dimensions: (1) financial information quality, (2)
ownership structure, (3) shareholder rights, and (4) board structure. We find that
firms reporting larger abnormal accruals and less transparent earnings have a higher
cost of equity, whereas firms with more independent audit committees have a lower
cost of equity. We also find that firms with a greater proportion of their shares
held by activist institutions receive a lower cost of equity, whereas firms with
more blockholders have a higher cost of equity. Moreover, we find a negative relation
between the cost of equity and the independence of the board and the percentage of
the board that owns stock. Collectively, the governance attributes we examine explain
roughly 8% of the cross-sectional variation in firms' cost of capital and 14 % of
the variation in firms' beta. The results support the general hypothesis that firms
with better governance present less agency risk to shareholders resulting in lower
cost of equity capital.

We construct a corporate governance practices index (CGI) from a set of 24 questions
that can be objectively answered from publicly available information. Our goal was
to measure the overall quality of corporate governance practices of the largest possible
number of firms without the biases and low response ratios typical of qualitative
surveys. CGI levels have improved over time in Brazil. CGI components demonstrate
that Brazilian firms perform much better in disclosure than in other aspects of corporate
governance. We find very high concentration levels of voting rights leveraged by
the widespread use of indirect control structures and non-voting shares. Control
has concentrated between 1998 and 2002. We do not find evidence for either entrenchment
or incentives in Brazil using ownership percentages but find that the separation
of control from cash flow rights destroys value. The CGI maintains a positive, significant,
and robust relationship with corporate value. A worst-to-best improvement in the
CGI in 2002 would lead to a .38 increase in Tobin's q. This represents a 95% rise
in the stock value of a company with the average leverage and Tobin's q ratios. Considering
our lowest CGI coefficient, a one point increase in the CGI score would lead to a
6.8% rise in the stock price of the average firm in 2002. We found no significant
relationship between governance and the dividend payout but there are indications
that dividend payments are greater when control and cash flow rights concentration
are greater. We place our results in context by offering a comparative analysis with
Chile. We would offer a sound "yes" if asked whether good corporate governance practices
increase corporate value in Brazil.

This paper studies how the main institutional factors characterizing corporate governance
systems around the world affect the relationship between ownership structure and
firm value. Our study gives rise to the following findings. First, ownership concentration
and insider ownership levels are determined by several institutional features such
as investor protection, development of capital markets, activity of the market for
corporate control, and effectiveness of boards. Second, the relationship between
ownership concentration and firm value is not directly affected by these institutional
factors. Third, there is, however, a direct influence of corporate governance characteristics
on the relationship between insider ownership and firm value.

This paper studies how the main institutional factors characterizing corporate governance
systems around the world affect the relationship between ownership structure and
firm value. Our study gives rise to the following findings. First, ownership concentration
and insider ownership levels are determined by several institutional features such
as investor protection, development of capital markets, activity of the market for
corporate control, and effectiveness of boards. Second, the relationship between
ownership concentration and firm value is not directly affected by these institutional
factors. Third, there is, however, a direct influence of corporate governance characteristics
on the relationship between insider ownership and firm value.

We examine the relation between a broad set of corporate governance indicators and
various measures of managerial decision making and organizational performance. Using
a sample of 2,106 firms, we distill 39 structural measures of corporate governance
(e.g., board characteristics, stock ownership, institutional ownership, activist
stock ownership, existence of debt-holders, mix of executive compensation, and anti-takeover
variables
into 14 governance constructs using principal components analysis. We find that these
14 constructs are related to future operating performance, have a somewhat mixed
association with abnormal accruals, Tobin’s Q, and future excess stock returns,
and little relation to class action lawsuit and accounting restatements.

Institutional shareholdings have a systematically positive effect on firm value and
alter the Morck, Shleifer, and Vishny (1988) finding of a nonmonotonic relation between
insider ownership and value. The evidence indicates that, on average, a 1% increase
in institutional stock ownership translates to a 0.6% increase in the firm's market-to-book
ratio, or an increase of $125M for the mean firm in cross-sectional analysis. Controlling
for institutional holdings converts the original MSV finding - that firm value first
increases with stock ownership by the board, then decreases, and then increases again
- to one in which firm value uniformly increases with greater board ownership. These
findings support the view that increased incentives for monitoring both by the board
and by institutional investors consistently leads to higher company value. The evidence
also indicates that the positive relation between institutional holdings and firm
value is stronger in firms with higher discretionary cash flows and in the period
following the 1992 adoption of proxy rule amendments that increased the bargaining
power of institutions.

Paper presents a short overview of the New Institutional Economics. It is not intended
to be a complete survey of the field but an extract that concentrates on the specific
arguments made here that are in contrast with the assumptions commonly made in mainstream
theory. Since the aim of this paper is to come up with policy implications, specific
assumptions will be emphasized only if they might become crucial for policy implications.
The results of some empirical studies are presented after having dealt with some
of the methodological problems. One of the parts focuses on the NIE in the context
of the transition economies of Central and Eastern Europe.

Strategic cost management is deliberate decision-making aimed at aligning the firm's
cost structure with its strategy and optimizing the enactment of the strategy. Alignment
and optimization must comprehend the full value chain and all stakeholders to ensure
long run sustainable profits for the firm. Strategic cost management takes two forms:
structural cost management, which employs tools of organizational design, product
design and process design to build a cost structure that is coherent with strategy;
and executional cost management, which employs various measurement and analysis tools
(e.g., variance analysis, analysis of cost drivers) to evaluate cost performance.
In this chapter I develop a model that relates strategic cost management to strategy
development and performance evaluation. I argue that although management accounting
research has advanced our understanding of executional cost management, other management
fields have done more to advance our understanding of structural cost management.
I review research in a variety of management fields to illustrate this point. I conclude
by proposing that management accounting researchers are uniquely qualified to create
a body of strategic cost management knowledge that unifies structural and executional
cost management.

This paper discusses the three approaches within economic history that utilizes micro-economic
theory to examine institutions, their nature, change, and efficiency: the Neo-classical
Economics approach, the New Institutional Economic History approach, and Historical
Institutional Analysis approach. The focus is on methodology and general results
rather than on any specific conclusions regarding institutions in particular historical
episodes. Most of the survey is devoted to elaborate on the recent development of
Historical Institutional Analysis.

This paper examines the extent to which common knowledge regarding social structure
impact the set of feasible institutions and thereby the scope of inter-community,
impersonal market exchange. When this extent is large, economic agents can condition
their actions on ones social affiliation thereby enabling the operation of an institution
taking advantage of intra-community, personal contract enforcement to support inter-community,
impersonal exchange. This argument is embedded in a historical study of contract
enforcement institution that supported inter-community, impersonal exchange in pre-modern
Europe. The papers game theoretical and historical analysis indicates the importance
of a particular institution the Community Responsibility System in supporting inter-community,
impersonal exchange from as early as the twelfth century despite the lack of appropriate
legal contract enforceability provided by the state. Thus, the analysis suggests
the deficiency of the common view in economic history that in pre-modern Europe impersonal
exchange were not conducted before the emerging states established the appropriate
legal system. By the thirteenth century, however, various communities attempted to
abolish the Community Responsibility System and substitute it with legal contract
enforcement provided by the state. Social processes that impact the extent to which
social structure is common knowledge, communities size, intra-community heterogeneity,
and inter community mobility were important contributors to this transition

Since the beginning of the 21st century, a few serious financial scandals and many
cases of corporate mismanagement have driven scholars and politicians to devote increasing
attention to corporate governance, in a close relation with business ethics issues.
In academic literature, as well as in public policy debates, corporate governance
is nowadays acknowledged as a critical factor in economic development and financial
markets stability. The evolution in the nature of the firm is among the major causes
for the crisis of established corporate governance models. The traditional manufacturing
companies - vertically integrated and capital intensive - which emerged at the beginning
of the last century and had since then prevailed - have been challenged by new organizational
structures, based on intangible assets and networks, more appropriate to a dynamically
changing environment, where competition is driven by the availability of distinctive
competencies, based on firm-specific knowledge.
This paper, building on the resource based view of the firm, but also on stakeholder
approach to strategic management, explores how the growing importance of intangible
assets is reshaping, in many industries, the basic conditions of corporate governance.
The aim is twofold: i) to explain logically why intangible assets modifies the allocation
of residual claims, as company performance can substantially affect the wealth of
other stakeholders ii) to determine which constituencies should be considered as
relevant stakeholders and contribute, to some extent, to the corporate governance.

We develop a dynamic model in which traders have differential information about the
true value of the risky asset and trade the risky asset with proportional transaction
costs. We show that without additional assumption, trading volume can not totally
remove the noise in the pricing equation. However, because trading volume increases
in the absolute value of noisy per capita supply change, it provides useful information
on the asset fundamental value which cannot be inferred from the equilibrium price.
We further investigate the relation between trading volume, price autocorrelation,
return volatility and proportional transaction costs. Firstly, trading volume decreases
in proportional transaction costs and the influence of proportional transaction costs
decreases at the margin. Secondly, price autocorrelation can be generated by proportional
transaction costs: under no transaction costs, the equilibrium prices at date 1 and
2 are not correlated; however under proportional transaction costs, they are correlated
- the higher (lower) the equilibrium price at date 1, the lower (higher) the equilibrium
price at date 2. Thirdly, we show that return volatility may be increasing in proportional
transaction costs, which is contrary to Stiglitz 1989, Summers & Summers 1989’s
reasoning but is consistent with Umlauf 1993 and Jones & Seguin 1997’s empirical
results